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Salomon - IR 98 1 Q (Page 9)

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Salomon - IR 98 1 Q
Salomon Swapco Inc
Summary of Accounting Policies
Related parties
Swapco is organized as a legally and financially separate,
bankruptcy remote corporation from its Salomon Smith
Barney and Travelers affiliates. As a result, Swapco's
creditors rely on Swapco's credit, not on Salomon Smith
Barney's or on Travelers'.
SBHC has contributed capital to Swapco for the purpose
of enhancing the creditworthiness of Swapco's
obligations. This capital is not available for Salomon
Smith Barney or Travelers creditors until Swapco's
creditors have been paid in full.
Under the terms of its Certificate of Incorporation,
Swapco is required to have two independent directors on
its board and one independent officer responsible for
important aspects of day-to-day operations. Currently,
the Company has four independent directors and two
independent officers.
Swapco's assets are invested separately from those of
Salomon Smith Barney or of Travelers and are held by a
third-party custodian. Significant relationships between
Swapco and its affiliates are governed by formal
agreements which are designed to compensate each of the
parties on terms which approximate those which would
prevail in comparable arms-length transactions.
Certain Swapco costs are incurred, in the first instance,
by other Salomon Smith Barney affiliates on Swapco's
behalf. Such amounts are reimbursed by Swapco on a
monthly basis.
Swapco's employees are all seconded employees of
Salomon Smith Barney. As such, those employees
participate in medical and other employee benefit plans
of Salomon Smith Barney. Swapco reimburses the
relevant Salomon Smith Barney affiliates on a monthly
basis for the full cost of that participation.
Salomon Swapco Inc
Notes to Financial Statements
Note 1. Citigroup merger
On April 6, 1998, Travelers Group and Citicorp
announced an agreement to merge. Swapco is
structurally unaffected by this change in its ultimate
ownership and no Swapco trades will be terminated
because of it. The merger is not a trigger event for
Swapco. Swapco's triple-A ratings have been reaffirmed
by all of its rating agencies: Fitch, Moody's and Standard
& Poors.
Note 2. Derivatives portfolio
Swapco's derivatives portfolio at March 31, 1998
included transactions with an aggregate notional
principal amount of $257 billion. Each of those
transactions is matched with an offsetting trade with
SBHC, producing a total notional portfolio of $515
In addition, at March 31, Swapco had guaranteed
transactions of Salomon Smith Barney affiliates with an
aggregate notional amount of $57 million. For these
transactions, Swapco has accepted a contingent liability
only. Swapco will be called upon to perform only in the
event of a default on the part of the Salomon Smith
Barney entity that entered into the transaction. The
current market value of all guaranteed transactions (if in
the customer's favor), plus a margin to protect against
changes in value, is included as part of Swapco's
minimum required capital.
Swapco enters into transactions with counterparties rated
at least Baa3/BBB-/BBB- by Moody's, Standard & Poor's
and Fitch, or with counterparties that are not rated by
those services. Unrated counterparties at March 31, 1998
included U.S. banks and insurance companies, pension
funds, asset management funds, and a number of foreign
corporations. Many unrated counterparties have been
"approved" by the rating agencies, meaning that,
although they are not rated, their credit quality is deemed
to be at least investment grade for purposes of evaluating
Swapco's capital adequacy.

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